MANAGEMENT 1 controlling.

As previously discussed, planning

CHAPTER 7: CONTROLLING identifies the things to do for future
accomplishment. The failure of controlling
CONTROLLING would mean failure of planning, and success of
Controlling is the process of measuring and planning means success of controlling. After
correcting activities (plans, organization, measuring the plans, and knowing that the
personnel, etc.) of an organization. Controlling plans are not realistic, a modified or new plan
determines what is being tackled by evaluating must be formulated.
the performance and, if there is a deviation, by
applying corrective measures so that the At middle and lower levels, a problem occurs
activities take place according to plans. when the objectives for which the manager is
Controlling can be considered as the activity for responsible are not being met. These may be
knowing and correcting important changes in departmental objectives, production standards,
the activities that are planned. Normally, a or other performance indicators. All forms of
business organization experiences some errors management controls are designed to give the
and negative performance so that the function manager information regarding progress. The
of controlling is necessary. However, it is manager can use this information to:
important to keep in mind that the objective of 1. Prevent crises. If a manager does not
controlling is positive to achieve the goal within know what is going on, it is easy for
stated constraints, or by means of the planned small, readily solved problems to turn
activities. Controlling should never be into crises.
considered negative; it is a managerial necessity 2. Standardization outputs. Problems and
and a help, not an impediment or a hindrance. services can be standardized in terms of
quantity and quality through the use of
NATURE OF CONTROLLING good •controls.
In a situation where the other fundamental 3. Appraise employee performance.
functions of management (planning, organizing, Proper controls can provide the
staffing, directing) are performed perfectly, manager with objective information
controlling is still inevitable, for it is used to about employee performance.
further effect some improvements. There can 4. Update plans. Remember that the final
only be effective controlling if there are the step in the planning process is to control
other four fundamental functions of the plan. Controls allow the manager to
management. For instance, to meet the energy compare what is happening with what
crisis, the management trims manufacturing was planned.
and administrative costs by formulating the 5. Protect an organization's asset. Controls
company's cost reduction program and using can protect assets from inefficiency,
material substitutions (planning), centralizes or waste, and pilferage.
downsize structure for its diverse manufacturing
operations (organizing), and emphasizes
participation in decision making and adopts
employees' enrichment programs (directing). THE CONTROL PROCESS

The consequence of controlling these new Most of the definitions of control include the
management practices means big savings of steps or elements of the control process. In
millions of pesos in operation. The work is exercising the control function, a manager
accomplished at less cost but without sacrificing measures the performance of an individual,
product quality. Planning is related to plans, or programs against their predetermined
standards and take corrective actions if there modifications in the established standards. A
are any deviations. Thus, control involves: cushion effect must be provided in the control
1. Establishing standards. process by specifying on acceptable level of
2. Measuring performance against the degree of variations from the established
established standards. standards. To overcome this problem, in some
3. Comparison of actual performance. industries, standards may be in terms of ranges,
4. Taking corrective action when and such as 3 to 4 percent rejection rate and so on.
where deviations from the standards A participative approach in setting performance
occur. standards may be more effective. Such an
5. Making sure recommended corrective approach is encouraged under the management
actions are followed through. by objective method.
6. Establishing standards.
2. Measuring performance against the
It would be helpful on the part of the manager established standards.
to first focus on what he hopes to achieve, In evaluating the results of the various activities,
although we usually focus on profits or share of the manager views performance both in terms
the market. A more general way of looking at of quantitative measures and those aspects that
what constitutes good performance is in terms are difficult, if not impossible, to quantify (i.e.,
of productivity or output, expenses, utilization leadership, communication, etc.) If performance
of basic resources (men, money, methods, standards are clearly established and made
market, machines, materials). Standards are known to the performer of a job, then
desired levels of performance and constitute measurement of performance becomes easy.
the foundation of the control process. These Where it is difficult to establish standards,
serve as the criteria against which the measurement also becomes hard. For many
performance is evaluated by the manager. Just production type jobs and similar other activities,
imagine how we can evaluate any performance motion and time study technique is used in
without establishing standards which is not an setting up standards and as a result
easy task. This is specially true if the task is measurement of actual performance tend to be
complicated, long, time-consuming and involves simple.
many intangible factors. It is difficult to set
specific standards to measure the performance
of an executive. For operative or production Wherever vague standards exist, measurements
types of jobs, setting standards is relatively easy. are often equally vague. In recent years, new
methods and techniques were developed in the
area of performance measurement. Such
Some commonly used standards are: quantity, methods and techniques help to achieve
quality, time and cost. For instance, a worker objectivity and accuracy. Whatever the
must produce a number of units per day or per technique or method is involved, the basic
week (quantity); he must maintain a rejection procedure is to check the actual level and
rate of not more than 3 percent (quality); quality of output. The concept of measuring
complete his work within six months of the activities would result in what is being
assignment (time); and not exceed the stated accomplished. This is significant because it
costs in producing a specified number of units provides the real documented information
(cost). One precaution must be taken in which is subsequently compared with the
determining performance standards. It is not established standard. The most common means
always possible to achieve or maintain the of measurement are personal observations and
established standards. Certain unforeseen the use of statistical data and reports, both oral
circumstances may require some changes • or and written. In measuring an entity, there is
always the question of what criteria to consider. efforts (temporary redesign, overtime, more
In general cases, the most helpful criteria are: staff or equipment) to meet a particular
Quality. emergency, rush order or project, and
The performance for each group/department unexpected bottlenecks. When a significant
can be controlled based on the quality of its discrepancy occurs between the actual output
output. What is produced compared to what or performance and the planned or
should be produced, based on reasonable predetermined performance standards. Specific
expectancy for the group/department, can be action must be taken to correct the situation.
discovered. This is parallel to effectiveness. We have already examined two types of
Quantity. controls which specifically apply to corrective
This can be used as the control tool by finding action of the control process. Some innovative
out the amount or number of the output of the people and organizations have already built-in
group/department. The results could then be corrective actions in their control process, if the
used to judge the efficiency of the deviations are due to controllable factors.
group/department. This is parallel to efficiency.
Time. Some even go the extent of identifying the
This can be employed by formulating a uncontrollable factors and developing
timetable for achieving certain goals at certain alternative actions for deviations. When
dates. If actual performance deviates from the deviations occur and the procedure regarding
scheduled time, corrective action should be corrective actions are given in advance to the
applied. performance of job, actions can be taken
Cost. without delay.
The cost of production can be predetermined by
using the object tool as a guide to actual 5. Follow-Through.
production efforts and keep them within Recommendations or recommending corrective
desired and expected limits. actions also are not sufficient and the manager
should not assume that his responsibility is over.
3. Comparison of Actual Performance Often the control process is ineffective or fails
This is the core of the control process. This because the corrective actions recommended is
phase of the control process involves checking not followed through. Specific procedures must
to determine whether the actual performance be established and the responsibility must be
meets the predetermined or planned clearly assigned to carry out the corrective
performance. Managers must constantly seek to actions. For instance, the performance
answer, "How well are we doing?" When a evaluation of a subordinate indicates
production supervisor checks the actual output weaknesses in supervisory practices - the
or performance of the department with the superior of this individual recommends a
production schedule, he is performing the corrective action by which the individual is to
comparison aspect of control. When an undergo some training in supervisory practices.
executive evaluates the performance of his The responsibility for that corrective action is
subordinates once in six months or annually, he not over just by making this recommendation.
is performing the comparison aspect of control. The superior must follow through his
Checking return on investment is a comparison recommendation to see whether the individual
place of control. participates and makes progress in the training
program and to what extent he relates to his
4. Taking corrective action when and where actual work situation whatever he has learned
deviations from the standards occur. in the training program.
Minor corrections or fine tuning may be
necessary to improve results or some major
CHARACTERISTICS OF CONTROL control based on the use to which a given
The function of control is to keep work moving control is put:
on schedule as planned towards the established 1. Controls used to standardize
objectives and goals. To achieve this, control performance.
should meet certain characteristics; This helps to increase efficiency and decrease
• Attuned to the activity. costs. Control mechanisms used for this purpose
Controls should reflect the needs of people are: motion and time studies, inspection,
using them. For instance, manufacturing people written procedures, and production schedules.
may require a kind of control which may not be 2. Controls used to safeguard company
applicable for marketing people. assets.
• Deviations must be identified quickly. The assets of a company must be protected
What is the use of checking the process or parts from theft, vandalism, wastage, and misuse. An
after they break down? adequate system of record keeping, custodial,
• Control must be forward-looking. and maintenance activities serves as control
Rather than relying on past indicators or mechanisms.
historical reports all the time, forecasts and 3. Controls used to standardize quality.
other forward looking devices must be used. For These help to maintain the specified quality
instance, focusing on probable problem areas level of products. Examples include blueprints,
and thus drawing attention for corrective action inspection, and statistical quality control
improved effectiveness. methods.
• Control must be strategically oriented. 4. Controls designed to set limits within
This involves selecting of the crucial points at which delegated authority can be
which control is applied. Care should be exercised without further top
exercised in selecting these crucial points. management approval.
• Control should be flexible. Manuals, procedures, policy statements and
Controls should permit for unexpected changes internal audits are some examples of this
or situations. Rigidity destroys effectiveness of category.
control. 5. Controls used to measure job
• Control should be economical. performance.
The cost of establishing and maintaining Special reports, output data, performance
controls should not exceed the benefits to be appraisals, and internal audits are typical
derived from them. examples.
• Control should be easy to understand. 6. Controls used for planning and
Unless people understand their purpose and the programming operations.
operations, they become useless. This type of controls include sales and
• Control should indicate corrective .action. production forecasts, budgets, cost standards
Who or what is causing deviations and vyhat and standards for work measurement.
should be done about it is the important aspect 7. Controls necessary to allow top
of control. management to keep the firm's various
plans and programs in balance.
Master budgets, policy and organizations
TYPES OF CONTROL manuals, committee approaches, and the use of
There are many different types of control to be outside consultants come into this category.
used for different purposes. A clear 8. Controls designed to motivate
understanding of these types of control would individuals.
enhance a manager's skill in exercising the Such controls would involve methods of
control function. Jerome offers a classification of recognizing achievement through promotions,
awards and so on.
Hodges and Ziegler point out specific controls sales or some other measure of output. Because
used in various areas of the organization. These of their nature, flexible budgets are generally
specific controls are listed under five types of limited to expense budgets. The basic idea is to
control such as, company wide controls, allow material, labor, advertising, and other
divisional controls, departmental controls, related expenses to vary with the volume of
operational controls, and functional controls. output. Because the actual level of sales or
This comprehensive list includes every aspect of output is usually not known in advance, flexible
the organization and the control network budgets are more useful for evaluating what the
covering these aspects. expense should have been under the
circumstances; they have limited value as
planning information for the overall budgeting
CONTROL METHODS AND SYSTEMS program.
There are two kinds of control methods:
behavior control and output control. Behavior Zero-Base Budgeting
(or personal) control is based on direct, personal Zero-Base Budgeting is one approach to
surveillance. The first-line supervisor who budgeting that has received attention over the
maintains a close personal watch over last several years. It requires each manager to
subordinates is using behavior control. Output justify an entire budget request in detail, from
(or impersonal) control is based on the scratch. The burden of proof is on each manager
measurement of outputs. to justify why any money should be spent.
Under zero-base budgeting, each activity under
Tracking production records or sales are a manager's discretion is identified, evaluated,
examples of output controls. Research has and ranked by importance. Then, each year
shown that these two categories of control are every activity in the budget is on trial for the life
not substitutes for each in the sense that a and is matched against all the other claimants
manager uses one of the other. The evidence for an organization's resources.
suggests that output control occurs in response
to a manager's need to provide an accurate Direct Observation
measure of performance. Behavior control is A store manager's daily tour of the facility; a
exerted when performance requirements are company president's annual visit to all
well known and personal surveillance is needed branches; a methods study by a staff industrial
to promote efficiency and motivation. Thomas engineer - all of these are examples of control
Peters and Robert Waterman strongly by direct observation. Although it is time-
emphasize the need for managers at all levels to consuming, personal observation is sometimes
take a hands-on approach to managing. By the only way to get an accurate picture of what
hands-on, they mean regularly mixing with is really happening. One hazard is that
subordinates and visiting them at their employees may misinterpret a superior's visit
workplaces. Thus, organizations need to use a and consider such action as meddling. Also
mix of output and behavior controls; each behavior changes when people are being
serves different organizational needs. A budget watched or monitored. Another potential
is statement of expected results or inaccuracy lies in the interpretation of the
requirements expressed in financial or observation. Visits and direct observations can
numerical terms. have positive effects when viewed by the
workers as a display of the superior's interest.
Flexible Budgets.
In order to overcome many of the shortcomings Written Reports
resulting from inflexibility, flexible (variable) Written reports can be prepared on a periodic
budgets are designed to vary with the volume of or "as necessary" basis. There are two basic
types of written reports, analytical and point (BEP) is the point at which sales revenues
informational. Analytical reports interpret the exactly equal expenses. Total sales below the
facts they present; informational reports only BEP results in a loss; total sales above the BEP
present the facts. results in a profit.

Preparing a report is a four- or five step process, Time Related Charts and Techniques
depending on whether it is informational or Gantt charts, the critical path method (CPM),
analytical. and the program evaluation review technique
The steps are: (PERT) are tools used to plan and schedule.
(1) planning the attack on the problem; These same tools can also be used for
(2) collecting the facts; controlling once the plans have been put into
(3) organizing the facts; action. By tracking actual progress compared to
(4) interpreting the facts (this step is omitted planned progress, activities that fall behind
with informational reports); and schedule can quickly be spotted.
(5) writing the report.
Management by Objectives
Most reports are prepared for the benefit of the Management by objectives (MBO) is an effective
reader, not the writer. The reader wants useful means for setting objectives. It also can be used
information not previously available ones. The for control purposes. As with many of the
need for a report should be carefully evaluated. control techniques discussed in this chapter, the
Such unnecessary reports are a waste of development of an MBO system is part of the
organizational resources. Another tendency planning function. However, once MBO is
even with necessary reports is to include implemented, it is used for control purposes.
useless information.
Management Information System
In recent years, the term management
Audits information system (MIS) has become popular.
Audits can be conducted either by internal or The Management Information System is a
external personnel. External audits are normally formal system for providing information to
done by outside accounts and are limited to managers. While not essential, most
financial matters. Most are to be done to certify management information systems include the
that the organization's accounting methods are use of a computer. The basic idea behind each
fair, consistent, and conform to existing MIS is to provide information in a systematic
practices. Most outside audits do not focus into and integrated manner, rather than in a
nonfinancial matters such as management sporadic and piecemeal manner.
practices. The internal audit, similar to the
external audit, is performed by the
organization's own personnel. When an audit ACCOUNTING CONCEPTS AND TECHNIQUES AS
looks at areas other than finances and CONTROL DEVICES
accounting,. it is known as management audit. Besides budgets, there are other accounting and
Management audits attempt to evaluate the financial concepts and techniques which are
overall management practices and policies of used as control devices. These include
the organization. responsibility accounting, cost accounting,
standard cost approach, direct costing, and ratio
They can be conducted by inside staff and can analysis. Under responsibility accounting,
easily result in a biased report. Break-Even responsibilities for each manager are identified
Charts depict graphically the relationship of and accounting records are designed to suit
volume of operations to profits. The break-even these responsibilities. Thus, each manager can
see the accounting analysis related to his they are incurred by the company irrespective
responsibilities. Cost accounting helps to of the production volume.
provide information and control costs. This 7. Test of financial leverage
approach deals with detailed analysis of costs These techniques present how a project
and show the cost of providing particular employs funds which pay a fixed return.
products and operating particular departments. 8. Tests of capital investment
Cost accounting uses standard costs as a These financial tools evaluate the justification
measure in its approach. Standard costs are for investing in the project.
estimated for each product prior to production
and after production they are compared against Quality Control
actual costs. Thus, they serve as control devices. Quality control deals with setting up of quality
Direct costing takes only labor and material cost standards in advance in such areas, as physical
as variable costs. Analysis through the use of characteristics, composition of the products,
ratios are also utilized by managers as control weight, size, color, strength, and performance,
mechanism. This position of the financial study and comparing these with actual standards.
gauges the project's profitability, liquidity, cash Before mass producing or even during the mass
solvency, and growth over time. It should be production stage, the quality of the product
noted that the functions elaborated below are must be tested to see whether the standards
meaningful only when compared with other are met. The products which do not meet the
functions of the same type completed in one standards are rejected.
year intervals. Charts and other visual devices
may be used to present the analysis more Production Control
effectively. Production control is the backbone of any
production system. The aim of production
1. Tests of liquidity control is to produce the right product in the
These measures are used to determine a firm's proper, quantity and quality, at the right time,
ability to meet short-term obligations, and to and by the best and least costly methods. A
remain solvent in the event of adversities. basic activity of production control is the
2. Tests of debt service supervision of workers while at production.
These tests are employed to present the Production control consists of planning the
project's ability to meet long-term obligations. individual production orders, releasing them for
3. Tests of profitability production, and following them through to
These show the operational performance and completion, thereby assisting management
efficiency of the project. control in their execution.
4. Test of total debt coverage =
Profit before interest ∧taxes Inventory Control
Inventory control is an essential sequence of a
( interest+ principal payments ) (1/1−income tax rate)
business operation. By maintaining an excess
5. Funds-flow analysis inventory, huge sums of money are tied up,
This technique is employed to determine the resulting in lost of interest or gain. By not
major uses and sources of funds. maintaining adequate inventory, delays are
6. Tests of operating leverage caused in the production process and as a result
These functions indicate how the projects products do not reach the market in time and
employ assets for which it pays a fixed cost. sales are lost. In order to run an efficient and
Before these tests are applied, a clarification effective production system, a balance must be
should be made on what "variable" and "fixed" maintained between these two conditions.
costs are. Generally, "fixed" costs are expenses Inventory control techniques help to strike this
which affect net income despite the fact that balance.
Economic Order Quantity
Economic order quantity (EOQ) is issued to
determine the most economic level of
inventory. At this level, the purchase quantity
minimizes total cost of purchase by balancing
costs associated with small orders. The costs
associated with large orders are cost of money
tied up in inventory and warehouse space. The
cost related to small orders are loss of quantity
discounts, cost of stockholders and clerical costs
in placing orders.

Maintenance of Inventory
When the inventory is received, people in the
receiving department check the number and
quality of the inventory and compare it with
orders. The inventory is sent to the stockroom.
Proper arrangement of inventory in stockrooms
saves costs and delays. When inventories are
large, proper identification such as the following
are used:
• Alphabetical: Based on same predetermined
scheme, a letter or group of letters are used.
• Mnemonic: The use of letters in some
combination such that they suggest the
classification name of the particular item.
• Numerical: The use of numbers to identify the
item.
• Sign: The use of symbols or signs to identify
the items.
• Combination: The use of any two of the above
methods.

Control by Reports
A manager, supervisor or a foreman cannot be
everywhere to check everything at all times. He
has to defend any reports for feedback of
information. Reports constitute the backbone of
control. As part of training, managers learn to
write reports of various sorts and interpret
them. Failure to handle the reports would affect
their decision making ability because feedback
of information provided through the reports
serves as input for many supervisory and
managerial decisions.